Lord Flight was Shadow Chief Secretary to the Treasury from 2001-2004. He is now chairman of Flight & Partners Recovery Fund.
Allegedly, many of the EU powers-that-be are not too concerned at the impact of a Grexit – or, rather a Greek shambles – largely, on the grounds that the Greek economy is relatively small (0.3 per cent of world GDP), and the resulting debt write offs are not of disaster-size proportions. Stock Markets have not been hit too badly and have, arguably, priced in the prospect of a Grexit for some time. The Greek fiasco may also strengthen David Cameron’s negotiating position.
But my instinctive perception is that a Greek shambles will be bad news for the EU and the Euro, and that the disastrous mismanagement of Greece by the EU going back several years will serve to expose both the non-viability of the Euro (without federal, political and economic union with transfer payments) as well as the contradictions at the centre of the EU project itself.
It has been clear for some time that Greece should never have joined the Euro, and did not qualify when its initial membership was ‘fixed’. It has also been apparent for some time that grinding the Greek economy into the ground – a fall of 25 per cent has served to render its debt position impossible, particularly, as tax revenues have, inevitably, fallen sharply.
What was needed three or four years ago, when Greece had a more amenable Government, was an appropriate IMF package supported by the EU, comprising of an element of debt forgiveness and debt extension, and a mini Marshal Plan to boost its economy – with Greece, in return, implementing sensible reforms to its pension and tax systems.
After Germany’s own political experience, when the post-First World War Treaty of Versailles served to grind its economy into the dirt, it is astonishing that Germans, today, do not realise that over-harsh economic measures invariably have dangerous, political results. This has happened in the case of Greece and threatens in the cases of Portugal, Spain and Italy, in due course.
The cost of a Greek default will be of the order of €340 billion of which €100bn approximately will fall on Germany. This will require a re-capitalisation of the ECB. It will also expose to Germans how the Euro Target clearing system can serve to inflict large losses on the Bundesbank.
A well-managed Greek exit from the Euro, with organised IMF and ECB support, would now be the best thing for the Greek economy, but this looks unlikely. The risk is of a shambles, leading, potentially, to hyper-inflation as the Greek Government is obliged to print money to meet its bills. The impact of this on Greek citizens and its middle classes could be extremely ugly.
Some may think this will be a useful lesson for other economies which are suffering as a result of Euro membership – teaching them that they had better do what Germany and the EU Commission tell them. But it seems to me the main lesson is that it discredits the whole Euro/EU project.
More fundamentally, the Eurozone can only survive and function satisfactorily if, like the US, and even the UK itself, it integrates economically, fiscally and politically with adequate transfer payments from the more to the less competitive participating economies. A Greek shambles demonstrates that the Eurozone cannot come together to solve problems like Greece; and, more particularly, that members, especially Germany, remain totally opposed to the necessary transfer payments.
In the case of the US, these amount to one-third of Federal spending and, in the UK, a total of circa £80 billion each year. Some may think that a Greek shambles will serve to advance Eurozone integration, but I much doubt this, given Germany’s determined opposition to financing transfer payments.
Of course the Greek Government should not be without criticism for not making sensible reforms to its tax and pension systems, but I suggest the EU and Germany are even more to blame over the last five years for not orchestrating an acceptable package for Greece with the key ingredient of affording economic recovery.
It may still be that the EU and Germany now back down and agree to a Greek package which is acceptable to the Greek Government. But if this is the outcome it sets an unwelcome precedent for other over-borrowed Euro members. In short, I suggest whatever the Greek outcome is will further undermine the credibility of both the Euro and the EU itself, and fan the flames of nationalism amongst EU member countries – the very opposite of what it is supposed to achieve.